Three of Australia's big banks have honed their case against Apple into a single issue: access to the iPhone's communications antenna.
In their latest submission published by the competition regulator on Monday morning, banks fighting Apple - Commonwealth Bank, National Australia Bank, Westpac and Bendigo and Adelaide Bank - have taken the issue of fees off the table. They no longer want to negotiate over Apple's insistence that fees for using Apple Pay not be passed on to customers and say Apple is "completely wrong in its assertion that the proposed conduct is about fees and not about access".
Rather, the banks now argue the technology giant's refusal to allow other apps to access the iPhone's "near field communications" (NFC) antenna is the only subject the Australian Competition and Consumer Commission needs to consider as it assessing their application for permission to collectively negotiate.
The banks say Apple's policy of locking off access to the NFC to any app other than its own Apple Pay product reduces competition in the market for digital wallets. This is because in order to function properly, digital wallets need to be able to communicate with contactless card terminals - something that Apple restricts to its own digital wallet.
The banks have asked the ACCC to allow them to negotiate collectively to increase their bargaining power over the world's largest company. They want their own digital wallets to be able to be set as the default app accessing the iPhone's NFC.
"The aim of the authorisation is to allow cardholders to have the choice of Apple Pay and other mobile wallets – allowing greater competition not only between cards but also between wallets and the distinct features those wallets may compete on," the banks said.
"NFC access allows real competition and real choice for consumers. If the customers ultimately prefer to use the Apple Pay wallet they can. The point of the authorisation is that consumers should be allowed to make that choice – not Apple."
The banks' insistence that Apple open its NFC before they agree for their cards to go on to the service comes after the global head of Apple Pay, Jennifer Bailey, told The Australian Financial Review last week that Apple still wants to work with the banks. But she warned them that they would lose customers to competitors like Macquarie, ING and ANZ Banking Group who have agreed to give Apple a small clip of transaction revenue to provide Apple Pay to their customers.
Yet independent analysts suggest that the take-up of Apple Pay, in Australia and globally, is very low. This suggests Apple may get more desperate to do a deal with the four applicant banks in Australia - which account for around two-thirds of the card market - in order to lift the usage of Apple Pay in Australia.
Apple's way not necessarily the right way
Even though Apple sees itself as one of the world's most innovative, the banks use their latest submission to cast Apple as being arrogant and unwilling to give competition a chance.
"For Apple to suggest that mobile payment services are not open to differentiation or improvement is short-sighted and reflects a failure to imagine any way of doing things other than Apple's way," the banks said.
They also suggest that Apple hoodwinked the ACCC with an example of "integration" of Apple Pay into the app of a US bank known as Capital One. Apple used the example to show the ACCC that it is willing to work with banks to bring Apple Pay into their own proprietary wallets and enable access to the NFC. But the applicant banks say the Apple Pay button in the Capital One app merely takes users outside the bank wallet and into Apple Pay.
"Customers cannot make mobile payments using Apple Pay from within the Capital One Wallet," the banks say. Apple is providing its wallet "in a profoundly discriminatory way", they add.
The banks say the ACCC's misunderstanding of the arrangement led the regulator - which denied the banks application in a draft decision in November - to form the wrong the definition of a digital wallet. This created an "artificial distinction" that considered Apple's digital wallet and Apple Pay separately. But that thinking has "led to some unfounded conclusions", the banks said. Separating Apple Pay and Apple's wallet "is artificial and mischaracterises the competitive dynamics of these services", the banks said.
Apple's latest submission to the ACCC "contains incorrect assertions and arguments underpinned by false assumptions", the banks said.
While the take-up of digital wallets - cards stored on smartphones - is currently very low, digital wallets are expected to grow sharply in the future as more and more cards, including driver licences, identity cards, health cards and loyalty schemes, are digitised.
The banks' submission to the ACCC also explains how NFC access will be important for a range of applications beyond payments. This include opening car or hotel doors, entering parking stations or checking in to airlines. The banks expect innovation in digital wallets to include providing itemised electronic receipts, coupons and warranty information digitally at the time of sale.
By allowing additional payment services to compete with Apple Pay, this "would also permit the development of mobile wallets that provide a far richer and wider range of functions and features than is possible at present, and would allow these mobile wallets to truly compete with the Apple Wallet," the banks said.
The banks case has widespread support from Australia's retail sector and also traditional foes such as payments terminal provider Tyro.
"Call it a case of strange bedfellows, yet Tyro agrees with the banks," Tyro executive director Jost Stollmann wrote on the company's blog after Ms Bailey's interview appeared in the Financial Review.
"What is at stake is transparency, innovation and competition being delivered to Australian consumers, especially in terms of businesses being able to choose mobile wallet solutions and the applications that they enable."
The banks have told the ACCC in their latest submission they hope a result of their application is that Apple opens the NFC to "other developers such as financial and other technology startups including those who are not card issuers."
Seamless user experience
Apple is arguing that giving the banks access to the NFC would result in a poor customer experience as users would have to toggle between alternative wallets through the phone settings menu. But the banks said that they want to work with Apple to make the experience of changing wallets simpler.
"The applicants seek to maintain the seamless user experience that Apple customers demand…they will work with Apple to ensure that NFC apps an co-exist on the iPhone and that the user experience in switching between then is simple and convenient for any user who wishes to install a competitive mobile wallet."
The banks also raise the possibility that Apple's security infrastructure is not as strong Apple has being making out.
While Apple insists that the combination of hardware and software is the best solution for security, the banks suggest that in the future, the system could be subjected to hacking. The banks say they acknowledge that the fingerprint Touch ID on the iPhone is more secure than a contactless card but "may still be vulnerable to attacks such as cloning a fingerprint from the prints on a screen which, while cumbersome at present, may become more widely available in the future."
While the issue of passing through fees has now been taken off the table, the banks respond to Apple's claim in its latest submission that the banks want digital wallets to be a new source of revenue. Rather, by locking up the NFC to its own app, "Apple's ability to unilaterally increase the fees it charges to issuers, small and large alike is relatively unconstrained," the banks warn.
Even though fees have been dropped from the table for collective negotiations, it will still be a matter for each bank to bilaterally discuss the level of fees with Apple should they enter into one-on-one negotiations after any collective negotiations, if approved, are conducted.
Apple has said it adopts uniform policies with banks around the world over Apple Pay and is not willing to give Australian banks special consideration. This suggests that if its policy over NFC access changes in Australia, the decision could have global implications.
